Wednesday, November 17, 2010

J.P. Morgan is making a gutsy call on American Axle (NYSE:AXL) upgrading the name to Overweight from Neutral with a $14 price target (prev. $12) for 2011. Additionally, the firm notes they see potential for an $18-20 stock two years from now.

JPM notes they shifted to a positive bias on AXL on Nov 1st post Q3, but now see improving risk-reward for this underloved stock following yesterday's updated backlog data release and analyst dinner driven by: 1) higher-than-expected 2011 production expectations on key platforms; 2) higher-than-expected backlog, particularly in 2012; 3) stronger conviction on at least $15-20MM of annualized incremental labor savings (achievable perhaps even before Feb 2012 contract expiry); and 4) lower-than-feared future margin pressure from revised commercial terms (negotiated in 2009 but only now coming more into light). Using an unchanged 4.5x EV/EBITDAPO multiple, updated 2010-ending projected pension deficit, and FCF available for debt paydown of $120MM in 2011E and $160MM in 2012E, one arrives at a $14 fair value using their now-raised 2012E EBITDA (15.4% EBITDA margin, 13.2MM US light SAAR) and $19 using their 2013E EBITDA (14.9% EBITDA margin, 14.5MM US light SAAR).

EBITDA is raised for 2011E from $358MM to $371MM and for 2012E from $418MM to $453MM, and JPM sees 2013E EBITDA potential of ~$500MM.

Notablecalls: So, finally JPM has the guts to upgrade AXL to an Overweight. They downgraded the name to Neutral back in 2008, just near the lows (around $2) and have been Neutral rated ever since.

In the n-t this one may be a solid sentiment call as GM IPO is set to open tomorrow after up-sizing the deal.

JPM is raising their out-year estimates and are calling for almost a double by 2013. This should spark some interest.

This one is not going to work in a huge way as the market is acting quite nervous lately but could end up as an OK performer in the n-t.